GLs on delineation and reporting of AFMs_consolidated version.pdf

General Information

This document is a guide entitled “Guidelines on the delineation and reporting of available financial means (AFM) of Deposit Guarantee Schemes (DGS)”, published by the European Banking Authority (EBA) in 2023. It is the consolidated version of the initial guidelines dated December 17, 2021, with application from March 30, 2022 and amendments planned for July 3, 2024. The guide is addressed to competent authorities supervising deposit guarantee schemes within the European Union. It covers the definition, qualification and reporting of available financial means of DGS, in connection with Directive 2014/49/EU (DGSD), to ensure European harmonization in the management and transparency of deposit guarantee funds (p. 1-4).

Executive Summary

The EBA guide concerns the delineation and reporting of available financial means (AFM) of deposit guarantee schemes (DGS) in the European Union, in accordance with Directive 2014/49/EU. It aims to distinguish qualified available financial means (QAFM), which count towards reaching the target level set by the directive, from other AFM which do not contribute. This distinction is essential to ensure consistency in calculating the DGS target level and transparency of data reported to the EBA. The guide specifies methods for allocating recoveries and investment income between QAFM and other AFM, as well as the treatment of loans between DGS. It requires competent authorities to ensure compliance of DGS under their supervision, notably regarding tracking the origin of funds and annual reporting to the EBA, including detailed information on funds, liabilities, inter-DGS loans and alternative financing arrangements. These guidelines have been mandatory for competent authorities since March 30, 2022, with a compliance notification obligation to the EBA before March 31, 2022. They contribute to strengthening supervision and stability of DGS in Europe by standardizing practices and improving transparency of available financial resources to protect depositors (p. 1-7).

Context and Objectives

Directive 2014/49/EU requires deposit guarantee schemes (DGS) to reach a target level of available financial means (AFM) to ensure depositor protection. However, the absence of a harmonized definition of qualified AFM (QAFM) and uniform rules for their calculation and reporting caused divergences among Member States, risking coherence and transparency of data. The EBA guide was developed to address this situation by clarifying the distinction between QAFM and other AFM, defining precise methods for the treatment of recoveries and investment income, and specifying DGS reporting obligations to the EBA. The objective is to ensure uniform application of the DGSD, facilitate supervision by competent authorities, and strengthen confidence in the capacity of DGS to intervene effectively in case of bank failure (p. 3-4).

Summary of Key Points by Theme

Definition and classification of financial means: The guide distinguishes AFM into two main categories: Qualified Available Financial Means (QAFM), which are funds directly or indirectly provided by institutions affiliated to the DGS and count towards the target level, and other AFM, including notably borrowed funds which do not contribute to the target level (p. 4).

Treatment of recoveries: Two alternative methods are proposed to allocate recoveries from DGS interventions between QAFM and other AFM. Approach A prioritizes allocation of recoveries first to other AFM up to the amount of liabilities, then to QAFM. Approach B calculates a specific debt ratio for the intervention to determine the share of recoveries allocated to other AFM. The choice of method must be communicated to the competent authority (p. 5-6).

Treatment of investment income: Income generated by DGS investments, if added to AFM, must be considered as QAFM, regardless of the initial funding source. Investment losses must be charged to QAFM (p. 6).

Loans between DGS: Funds lent by one DGS to another must not be counted in the lender’s AFM, QAFM or other AFM. Borrowed funds do not count as QAFM but may be considered as other AFM if they meet the definition (p. 6).

Reporting obligations: Competent authorities must submit annually to the EBA, before March 31, a detailed report including amounts of guaranteed deposits, AFM, QAFM, other AFM, liabilities related to interventions, inter-DGS loans, alternative financing arrangements, as well as the chosen method for allocation of recoveries. A standardized reporting template is provided in the annex (p. 7-8).

Main Findings and Lessons Learned

Findings: The guide establishes a clear and harmonized definition of QAFM and other AFM, as well as precise methods for their treatment, notably of recoveries and investment income. It formalizes DGS reporting obligations to the EBA, with an annual schedule and standardized format (p. 3-8).

Assumptions: The guide assumes that contributions from affiliated institutions form the basis of QAFM and that recoveries and investment income can be allocated according to two alternative methods, without imposing one method.

Interpretations: The EBA considers this harmonization necessary to guarantee consistency in calculating the DGS target level and comparability of reported data, thereby strengthening supervision and confidence in deposit guarantee mechanisms.

Uncertainties: The guide does not determine which funds are available for each specific intervention, leaving discretion to DGS and competent authorities. The impact of different recovery allocation methods on fund management remains to be observed in practice (p. 3-7).

Conclusions and Recommendations

The EBA recommends competent authorities strictly ensure application of these guidelines by DGS under their supervision, notably by guaranteeing that only QAFM are counted towards the target level set by the DGSD. DGS must choose and clearly communicate the recovery allocation method (approach A or B). Annual reporting to the EBA must be complete, accurate and comply with the provided template, including all required information on funds, liabilities, inter-DGS loans and financing arrangements. These measures aim to ensure better harmonization, transparency and reliability of DGS financial data, thereby strengthening the stability of the European banking system. The effective application date is March 30, 2022, with a compliance notification obligation to the EBA before March 31, 2022 (p. 1-7).